PowerPoint Presentation · Title: PowerPoint Presentation Author: Margaret McTernan Created Date:...

IBM3Q2019Earnings

Oct 16, 2019ibm.com/investor

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Certain comments made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on the company’s current assumptions regarding future business and financial performance. Those statements by their nature address matters that are uncertain to different degrees. Those statements involve a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Company’s filings with the SEC. Copies are available from the SEC, from the IBM web site, or from IBM Investor Relations. Any forward-looking statement made during this presentation speaks only as of the date on which it is made. The company assumes no obligation to update or revise any forward-looking statements except as required by law; these charts and the associated remarks and comments are integrally related, and are intended to be presented and understood together.

In an effort to provide additional and useful information regarding the company’s financial results and other financial information as determined by generally accepted accounting principles (GAAP), the company also discusses, in its earnings press release and earnings presentation materials, certain non-GAAP information including revenue for Red Hat normalized for historical comparability, revenue adjusting for divested businesses and currency, operating earnings, other “operating” financial measures, including free cash flow, net cash from operating activities excluding Global Financing receivables, and adjustments for currency. The rationale for management’s use of this non-GAAP information is included as Exhibit 99.2 to the company’s Form 8-K filed with the SEC on October 16, 2019. The reconciliation of non-GAAP information to GAAP is included on the slides entitled “Non-GAAP Supplemental Materials” in this presentation, as well as in Exhibit 99.1 to the company’s Form 8-K filed with the SEC on October 16, 2019. For other related information please visit the Company’s investor relations web site at:

http://www.ibm.com/investor/events/earnings/3q19.html

Forward Looking Statements and Non-GAAP Information

http://www.ibm.com/investor/events/earnings/3q19.html

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3Q19 $18.0B $2.68 $12.3B Revenue Operating (non-GAAP) EPS Free Cash Flow

Last 12 Months

Strong performance in cloud, data/AI, security and digital− Led by Cloud & Cognitive Software and Global Business Services

Momentum in hybrid cloud− Cloud revenue +14% yr/yr @CC*, $20 billion cloud revenue over last 12 months− >60% growth in cloud signings − Red Hat revenue growth accelerated to 20% yr/yr @CC**

Investing to deliver innovation− Launched z15 at the end of September− Modernized software portfolio to be cloud native

Strong cash generation and balance sheet− $6.7 billion debt reduction in the quarter

Overview

*Yr/Yr excludes impact of divested businesses** Normalized for comparability to Red Hat historical performance

Red Hat Update 4

● Completed acquisition of Red Hat on July 9

● Red Hat revenue growth accelerated to 20% yr/yr @CC*

− Double-digit growth in Infrastructure, led by RHEL− Continued strong growth in App Dev & emerging tech, led by OpenShift and Ansible

● Bringing innovation to market, leveraging Linux + containers + Kubernetes

− Standardized on Red Hat OpenShift platform− Modernized IBM middleware portfolio to be cloud native; introduced Cloud Paks− Announced OpenShift on IBM Cloud and IBM Z− Introduced consulting and technology services for Red Hat

● Adding new OpenShift clients and expanding in existing Red Hat clients

● Aggressive hiring to address client demand, with stable employee attrition

* Normalized for comparability to Red Hat historical performance

B/(W)

P&L Highlights (Operating) 3Q19 Yr/Yr

Gross Profit Margin 47.4% Flat

Expense $6.1 (16%)

Tax Rate 0.1% 12.7 pts

Net Income $2.4 (24%)

Earnings Per Share $2.68 (22%)

Cash Highlights LTM

Free Cash Flow (excl. GF Receivables) $1.8 $12.3

Share Repurchase (Gross) $0.1 $3.4

Dividends $1.4 $5.7

Cash Balance @ September 30 $11.0

*

B/(W)

Revenue Highlights 3Q19 Yr/Yr

Revenue $18.0 (0.6%)

Cloud & Cognitive Software $5.3 8%

Global Business Services $4.1 2%

Global Technology Services $6.7 (4%)

Systems $1.5 (14%)

Cloud Revenue $5.0 14%

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Key Financial Metrics

Expanded operating gross margin, excluding impact of divested businesses

Solid free cash flow performance, with normalized free cash flow realization of 126% over the last 12 months

Revenue growth rates @CC, $ in billions*Yr/Yr excludes impact of divested businesses

*

Financial results reflect impact of transaction-related adjustments associated with the acquisition of Red Hat

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Debt Update

● Debt reduction of nearly $7 billion since Red Hat close

● Suspended share repurchase to focus on debt reduction

● Committed to achieving leverage ratio consistent with mid to high single-A credit rating within a couple of years

$48B $43B

$25B

$23B

$73B

$66B

2Q19 3Q19

Total Debt

(Pre-Red Hat Close)

Core Debt

GlobalFinancingDebt

B/(W)

Segment 3Q19 Yr/Yr

Revenue (External) $5.3 8%

Pre-Tax Income $1.3 (37%)

Pre-Tax Income Margin 21.5% (14.2 pts)


includes Red Hat

Cognitive Applications

+6% Yr/YrCloud & Data Platforms+19% Yr/Yr

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Revenue growth rates @CC, $ in billions

Cloud & Cognitive Software Segment

Cloud & Data Platforms growth driven by hybrid cloud strategy, including Red Hat

Cognitive Applications performance led by integrated security solutions and verticals such as IoT

Pre-tax income reflects investments for software innovation and impacts from transaction-related adjustments

Segment Revenue ElementsSegment Results Overview

Transaction Processing

Platforms(4%) Yr/Yr

Segment results reflect impact of transaction-related adjustments associated with the acquisition of Red Hat

B/(W)

Segment 3Q19 Yr/Yr

Revenue (External) $4.1 2%

Gross Profit Margin (External) 31.1% 1.1 pts

Pre-Tax Income $0.6 1%

Pre-Tax Income Margin 13.7% 0.1 pts


Global ProcessServices

(3%) Yr/Yr

Consulting+5% Yr/Yr

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ApplicationManagementFlat Yr/Yr

Global Business Services Segment

Revenue growth driven by application modernization for the cloud and next-generation enterprise apps

Early progress with Red Hat with over 20 deals signed in 3Q19

Gross margin expansion reflects shift to higher value, leveraging global delivery footprint and productivity actions



B/(W)

Segment 3Q19 Yr/Yr

Revenue (External) $6.7 (4%)

Gross Profit Margin (External) 35.8% (1.2 pts)




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Infrastructure& CloudServices(4%) Yr/Yr

TechnologySupportServices(3%) Yr/Yr

Global Technology Services Segment

Revenue and gross margin impacted by in-period client business volumes

Signings growth of 20% contributed to sequential improvement in yr/yr backlog growth

Cloud signings grew over 60% yr/yr; cloud now represents over 40% of outsourcing backlog


Growth rates @CC, $ in billions

B/(W)

Segment 3Q19 Yr/Yr

Revenue (External) $1.5 (14%)



Cloud Revenue $0.5 (19%)

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Systems Segment

IBM Z revenue performance reflects back end of z14 cycle; new z15 shipments in last week of the quarter

Power performance driven by challenging yr/yr compare

Margin reflects mix headwinds and investments for portfolio innovation

SystemsHardware(16%) Yr/Yr

OperatingSystems Software(7%) Yr/Yr



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Balance Sheet Sep 19 Dec 18 Sep 18

Cash & Marketable Securities $11.0 $12.2 $14.7

Global Financing Debt $23.1 $31.2 $30.4

Core (non-GF) Debt $43.2 $14.6 $16.6

Total Debt $66.3 $45.8 $46.9

Cash Flow 3Q19 Yr/Yr LTM

Net Cash from Operations** $2.5 ($0.7) $14.9

Free Cash Flow** $1.8 ($0.4) $12.3

Selected Uses of Cash

Net Capital Expenditures $0.7 $2.6

Acquisitions $32.6 $32.6

Dividends/Share Repurchase $1.6 $9.1

Cash Flow and Balance Sheet Highlights

● Free cash flow up $0.5 billion year-to-date; 3Q19 yr/yr impacted by cash tax payments

● Free cash flow realization 126%* over last 12 months

● Debt reduction of nearly $7 billion since Red Hat close

$ in billions*Adjusted for charges associated with enactment of U.S. tax reform**Non-GAAP metrics; excludes Global Financing receivables

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Summary

Strong performance in cloud, data/AI, security and digital

Momentum in hybrid cloud across IBM, including Red Hat

Investing to deliver innovation

Strong cash generation and balance sheet

Continue to expect at least $12.80 of operating earnings per share, and approximately $12 billion of free cash flow

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ibm.com/investor

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Supplemental Materials

● Currency – Impact on Revenue Growth

● Additional Revenue Information

● Additional Revenue, Gross Profit & Backlog Information

● Global Technology Services Revenue Dynamics

● Expense Summary

● Balance Sheet Summary

● Cash Flow Summary

● Cash Flow (ASC 230)

● Non-GAAP Supplemental Materials

Some columns and rows in these materials, including the supplemental exhibits, may not add due to rounding

10/15/2019

Quarterly Averages per US $ 3Q19 Yr/Yr Spot 4Q19 FY19 1Q20 FY20

Euro 0.90 (5%) 0.91 (3%) (6%) (3%) (1%)

Pound 0.81 (6%) 0.78 (1%) (5%) (2%) 0%

Yen 107 4% 109 4% 1% 1% 0%

Revenue Impact, Future @ 10/15/19 Spot (1.3 pts) ~(1-1.5 pts) ~(2 pts) ~(1-2 pts) ~(1 pts)

Prior View @ 7/16/19 Spot ~(1 pts) 0 pts ~(2 pts)

US$B Yr/Yr

Revenue As Reported $18.0 (3.9%)

Currency Impact ($0.2) (1.3 pts)

Revenue @ CC (2.6%)

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Currency – Impact on Revenue Growth


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B/(W)

Geography Revenue 3Q19 Yr/Yr

Americas $8.5 (1%)

Europe/ME/Africa $5.5 Flat

Asia Pacific $4.0 (1%)

B/(W)

Segment Revenue 3Q19 Yr/Yr

Cloud & Cognitive Software $5.3 8%

Cognitive Applications $1.4 6%

Cloud & Data Platforms $2.3 19%

Transaction Processing Platforms $1.6 (4%)

Global Business Services $4.1 2%

Consulting $2.0 5%

Global Process Services $0.2 (3%)

Application Management $1.9 Flat

Global Technology Services $6.7 (4%)

Infrastructure & Cloud Services $5.1 (4%)

Technology Support Services $1.6 (3%)

Systems $1.5 (14%)

Systems Hardware $1.1 (16%)

Operating Systems Software $0.4 (7%)

Global Financing $0.3 (11%)

Additional Revenue Information

Revenue growth rates @CC, $ in billions*Yr/Yr excludes impact of divested businesses


*

*

B/(W)

Cloud Revenue Revenue Yr/Yr

Total Cloud - 3Q19 $5.0 14%

Total Cloud - LTM $20.0

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B/(W)

Signings & Backlog* 3Q19 Yr/Yr

Signings $9.0 15%

Backlog $107.6 (2%)

Backlog Yr/Yr @Actual (5%)

B/(W)

Systems Revenue 3Q19 Yr/Yr

Systems Hardware Revenue $1.1 (16%)

IBM Z (20%)

Power (27%)

Storage (4%)

Additional Revenue, Gross Profit & Backlog Information

Growth rates @CC, $ in billions, Services Backlog calculated using September 30 currency spot rates*Signings & Backlog includes Global Technology Services, Global Business Services and Security Services; consistent with 2018 reporting


B/(W)

Systems Gross Profit 3Q19 Yr/Yr

Systems Gross Profit 52.6% Flat

Systems Hardware 42.8% (0.2 pts)

Operating Systems Software 82.6% (2.4 pts)

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Global Technology Services Revenue Dynamics

3Q19 Infrastructure Services Revenue Dynamics

● Revenue impacted by lower in-period client business volumes

Positioned to win in chapter 2 of cloud

● 3Q19 cloud signings >60% yr/yr

● >40% of GTS outsourcing backlog is cloud

● Robust pipeline of cloud opportunities

● Repositioning portfolio with continued investment in cloud

▪ Revenue (4%) Yr/Yr, consistent with opening backlog run-out

▪ 3Q19 client business volumes impact 2H19 revenue growth

Revenue growth rates @CC


2Q19 3Q19 4Q19

Actual revenue impact from 2Q volumes~0 pts

2Q19 2H19

(4%) Yr/Yr (4%) Yr/YrRevenue Revenue

Projected revenue from backlog run-out as of Apr 1~(4%) Yr/Yr

Projected revenue from backlog run-out as of Jul 1~(3%) Yr/Yr

Actual revenue impact from 3Q volumes~(1 pt)

Projected revenue impact from 3Q volumes~(1 pt)

Projected revenue impact from 4Q volumes0 to (1 pt)

Projected revenue from backlog run-out as of Jul 1(1-2%) Yr/Yr

B/(W) Acq./

Expense 3Q19 Yr/Yr Currency Divest* Base**

SG&A – Operating $4.6 (8%) 2 pts (10 pts) 1 pts

RD&E – Operating $1.5 (20%) 1 pts (12 pts) (8 pts)

IP and Custom Development Income ($0.2) (40%)

Other (Income)/Expense - Operating ($0.2) 45%

Interest Expense - Operating $0.4 (113%)

Operating Expense & Other Income $6.1 (16%) 2 pts (14 pts) (4 pts)

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Expense Summary


$ in billions*includes acquisitions in the last twelve months net of non-operating acquisition-related charges and includes impact of divested businesses**represents the percentage change after excluding the impact of currency, acquisitions and divestitures

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Sep 19 Dec 18 Sep 18

Cash & Marketable Securities $11.0 $12.2 $14.7

Core (non-GF) Assets* $113.3 $71.7 $71.3

Global Financing Assets $25.4 $39.5 $36.0

Total Assets $149.6 $123.4 $122.0

Other Liabilities $65.2 $60.6 $55.2

Core (non-GF) Debt* $43.2 $14.6 $16.6

Global Financing Debt $23.1 $31.2 $30.4

Total Debt $66.3 $45.8 $46.9

Total Liabilities $131.5 $106.5 $102.1

Equity $18.1 $16.9 $19.9

Balance Sheet Summary

*includes eliminations of inter-company activity


$ in billions

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QTD B/(W) YTD B/(W)

3Q19 Yr/Yr 3Q19 Yr/Yr

Net Cash from Operations $3.6 ($0.6) $11.3 $0.2

Less: Global Financing Receivables $1.1 $0.0 $3.7 $0.8

Net Cash from Operations (excluding GF Receivables) $2.5 ($0.7) $7.6 ($0.6)

Net Capital Expenditures ($0.7) $0.3 ($1.7) $1.1

Free Cash Flow (excluding GF Receivables) $1.8 ($0.4) $5.9 $0.5

Acquisitions ($32.6) ($32.6) ($32.6) ($32.5)

Divestitures $0.0 $0.0 $0.9 $0.9

Dividends ($1.4) ($0.0) ($4.3) ($0.0)

Share Repurchases (Gross) ($0.1) $0.5 ($1.4) $1.0

Non-GF Debt ($5.0) ($7.2) $28.4 $26.8

Other (includes GF Net A/R & GF Debt) $1.8 $1.4 $1.8 $0.2

Change in Cash & Marketable Securities ($35.5) ($38.2) ($1.3) ($3.1)

Cash Flow Summary


$ in billions

QTD QTD YTD YTD

3Q19 3Q18 3Q19 3Q18

Net Income from Operations $1.7 $2.7 $5.8 $6.8

Depreciation / Amortization of Intangibles $1.7 $1.1 $4.4 $3.4

Stock-based Compensation $0.2 $0.1 $0.5 $0.4

Working Capital / Other ($1.1) ($0.8) ($3.0) ($2.3)

Global Financing A/R $1.1 $1.1 $3.7 $2.9

Net Cash provided by Operating Activities $3.6 $4.2 $11.3 $11.1

Capital Expenditures, net of payments & proceeds ($0.7) ($0.9) ($1.7) ($2.8)

Divestitures, net of cash transferred $0.0 $0.0 $0.9 $0.0

Acquisitions, net of cash acquired ($32.6) ($0.0) ($32.6) ($0.1)

Marketable Securities / Other Investments, net $2.9 ($2.0) $6.4 ($2.4)

Net Cash provided by/(used in) Investing Activities ($30.4) ($3.0) ($27.1) ($5.4)

Debt, net of payments & proceeds ($6.6) $1.6 $20.5 $0.8

Dividends ($1.4) ($1.4) ($4.3) ($4.2)

Common Stock Repurchases ($0.1) ($0.6) ($1.4) ($2.4)

Common Stock Transactions - Other ($0.0) $0.0 ($0.1) ($0.1)

Net Cash provided by/(used in) Financing Activities ($8.2) ($0.4) $14.7 ($5.9)

Effect of Exchange Rate changes on Cash ($0.4) ($0.1) ($0.4) ($0.4)

Net Change in Cash, Cash Equivalents & Restricted Cash ($35.3) $0.8 ($1.4) ($0.5)

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Cash Flow (ASC 230)


$ in billions

2019 Full-Year Expectations

GAAP Diluted EPS at least $10.58

Operating EPS (Non-GAAP) at least $12.80

Adjustments

Acquisition-Related Charges* $1.52

Non-Operating Retirement-Related Items $0.51

Tax Reform Enactment Impacts $0.19

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Reconciliation of Operating Earnings Per Share

Non-GAAP Supplemental Materials

*Includes acquisitions as of September 30, 2019.

The above reconciles the Non-GAAP financial information contained in the “3Q19 Prepared Remarks” discussion in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated October 16, 2019 for additional information on the use of these Non-GAAP financial measures.


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GAAP @CC

Global Technology Services (6%) (4%)

Infrastructure & Cloud Services (6%) (4%)

Technology Support Services (5%) (3%)

Cloud 8% 10%

Systems (15%) (14%)

Systems Hardware (17%) (16%)

IBM Z (21%) (20%)

Power (27%) (27%)

Storage (6%) (4%)

Operating Systems Software (8%) (7%)

Cloud (20%) (19%)

Global Financing (12%) (11%)

3Q19 Yr/Yr

Reconciliation of Revenue Performance - 3Q 2019


The above reconciles the Non-GAAP financial information contained in the “Key Financial Metrics”, “Cloud & Cognitive Software Segment”, “Global Business Services Segment”, “Global Technology Services Segment”, “Systems Segment”, “Additional Revenue Information”, “Additional Revenue, Gross Profit & Backlog Information”, and “3Q19 Prepared Remarks” discussions in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated October 16, 2019 for additional information on the use of these Non-GAAP financial measures.


GAAP @CC

Cloud & Cognitive Software 6% 8%

Cognitive Applications 4% 6%

Cloud & Data Platforms 17% 19%

Transaction Processing Platforms (5%) (4%)

Cloud 61% 63%

Global Business Services 1% 2%

Consulting 4% 5%

Global Process Services (5%) (3%)

Application Management (1%) Flat

Cloud 8% 10%

3Q19 Yr/Yr

GAAP Divest impact Currency impact Adjusted

Americas (4%) 3 pts 0 pts (1%)

Europe/ME/Africa (6%) 2 pts 4 pts Flat

Asia Pacific (1%) 1 pts (1 pts) (1%)

3Q19 Yr/Yr

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The above reconciles the Non-GAAP financial information contained in the “Additional Revenue Information” and “3Q19 Prepared Remarks” discussions in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated October 16, 2019 for additional information on the use of these Non-GAAP financial measures.



Total Cloud Revenue 11% 2 pts 2 pts 14%

3Q19 Yr/Yr


Revenue (3.9%) 2.0 pts 1.3 pts (0.6%)

3Q19 Yr/Yr

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The above reconciles the Non-GAAP financial information contained in the “Key Financial Metrics”, and “3Q19 Prepared Remarks” discussions in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated October 16, 2019 for additional information on the use of these Non-GAAP financial measures.


Revenue for Red Hat, Normalized for Historical Comparability Sep 30 2019 Sep 30 2018 Yr/Yr Yr/Yr@CC

Red Hat revenue as reported in IBM consolidated results (1) $371 $ -

Add: Red Hat revenue prior to acquisition (2) 84 829

Add: Purchase accounting deferred revenue and intercompany adjustments (3) 531 -

Red Hat revenue normalized for historical comparability (non-GAAP) $987 $829 19% 20%

Three Months Ended

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Reconciliation of Revenue for Red Hat, Normalized - 3Q 2019


The above reconciles the Non-GAAP financial information contained in the “Red Hat Update” and “3Q19 Prepared Remarks” discussions in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated October 16, 2019 for additional information on the use of these Non-GAAP financial measures.


(1) Represents GAAP Revenue as reported by IBM, which is included in the Cloud & Cognitive Software segment.

(2) Red Hat revenue was included in IBM’s consolidated results beginning on July 9, 2019. Revenue for July 1- July 8, 2019 and the three months ended September 30, 2018 represents pre-acquisition Red Hat standalone revenue and is included for comparative purposes.

(3) Represents the third-quarter 2019 impact of the deferred revenue purchase accounting adjustment and adjustments to add back revenue which was eliminated for sales between Red Hat and IBM. This line represents revenue that would have been recognized by Red Hat under GAAP if the acquisition had not occurred, but was not recognized by IBM due to purchase accounting and intercompany adjustments.

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Non-GAAP Operating

GAAP Adjustments (Non-GAAP)

SG&A

Currency 2 pts 0 pts 2 pts

Acquisitions/Divestitures (18 pts) 8 pts (10 pts)

Base* 1 pts 0 pts 1 pts

RD&E



Base* (8 pts) 0 pts (8 pts)

Operating Expense & Other Income



Base* 1 pts (5 pts) (4 pts)

3Q19

Reconciliation of Expense Summary - 3Q 2019


The above reconciles the Non-GAAP financial information contained in the “Expense Summary” discussion in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated October 16, 2019 for additional information on the use of these Non-GAAP financial measures.

*Represents the percentage change after excluding the impact of currency, acquisitions and divestitures.


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12 Months

Ended

Sep 2019

Net Cash from Operating Activities per GAAP: $15.4

Less: change in Global Financing (GF) Receivables $0.5

Net Cash from Operating Activities (Excluding GF Receivables) $14.9

Capital Expenditures, Net ($2.6)

Free Cash Flow (Excluding GF Receivables) $12.3

Reconciliation of Free Cash Flow - Last 12 Months


The above reconciles the Non-GAAP financial information contained in the “Overview”, “Key Financial Metrics”, “Cash Flow and Balance Sheet Highlights” and “3Q Prepared Remarks” discussions in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated October 16, 2019 for additional information on the use of these Non-GAAP financial measures.


$ in billions

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LTM Excluding

LTM Tax Reform*

Free Cash Flow Realization 160% 126%

Reconciliation of Free Cash Flow Realization - Last 12 Months


The above reconciles the Non-GAAP financial information contained in the “Key Financial Metrics”, “Cash Flow and Balance Sheet Highlights” and “3Q Prepared Remarks” discussions in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated October 16, 2019 for additional information on the use of these Non-GAAP financial measures.

* Adjusted for the charges associated with enactment of U.S. tax reform


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Reconciliation of Tax Rate


The above reconciles the Non-GAAP financial information contained in the “3Q Prepared Remarks” discussion in the company’s earnings presentation. See Exhibit 99.2 included in the company’s Form 8-K dated October 16, 2019 for additional information on the use of these Non-GAAP financial measures.


Tax Rate Expectation GAAP Non-GAAP

Full Year 2019* 8-9% 9-10%

*includes estimate of discrete tax events for the year; actual events will be recorded as they occur

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PowerPoint Presentation · Title: PowerPoint Presentation Author: Margaret McTernan Created Date:...

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